Ontario Court Of Appeal Affirms Scope Of "Equity Claims" Under The Bankruptcy And Insolvency Act

Equity claims are often considered the “poor cousin” of creditor claims in insolvency proceedings. They generally rank below creditors, have fewer rights and rarely is there recovery on equity investments under the Bankruptcy and Insolvency Act (the “BIA“). A case in point is YG Limited Partnership and YSL Residences Inc. (Re), 2025 ONCA 591, in which the Court of Appeal upheld a lower court's finding that a former executive's claim for a share of project profits was a contractual damages claim—not an equity claim—and therefore one provable in bankruptcy under the BIA.

Background: a failed building project and a terminated executive

YSL Residences Inc. (“YSL“) was the general partner of YG Limited Partnership (“YG“), which owned a property on which they intended to develop an 85-storey building (the “YSL project“). YSL was on one of several companies known by the trade name the “Cresford Group”. In 2021 and before the YSL project was built, YSL and YG filed Notices of Intention to Make a Proposal under the BIA. KSV Restructuring Inc., was appointed as proposal trustee (the “Proposal Trustee“).

The proposal that ended up receiving court approval involved the acquisition of the YSL project by Concord Properties Developments Corp., who, among other things, would assume liability for all secured creditor claims and pay $30.9 million to the Proposal Trustee towards paying proven unsecured claims. Any remaining funds would go to equity owners, including the limited partners.

Maria Athanasoulis, a former executive of the Cresford Group, was dismissed in 2019 while serving as its President and COO. While employed by the Cresford Group, Ms. Athanasoulis entered into a verbal profit sharing agreement with Cresford Group by which she would receive 20% of the profits from the YSL project. It was not disputed that:

1. the profit sharing agreement was valid;
2. the profit shareable to Ms. Athanasoulis was net amounts payable to the limited partners, including return of capital and dividend earnings; and
3. the profit sharing agreement would survive

Ms. Athanasoulis' departure from Cresford Group. Ms. Athanasoulis' filed a proof of claim for wrongful dismissal, claiming $1 million in damages, and for breach of an oral profit-sharing agreement, claiming $18 million in damages. If the Proposal Trustee allowed her profit-sharing claim as an unsecured claim, the limited partners would not recover since the pool of money available for paying proven unsecured claims would be exhausted.

Proposal Trustee Disallowance

The Proposal Trustee allowed the constructive dismissal claim but disallowed the profit-sharing claim, concluding it was “in substance” an equity claim, thus not a claim provable under the BIA. The Proposal Trustee also concluded that the claim too contingent to be considered a provable claim, as profit sharing was based on the projected future profitability. Lastly, the Proposal Trustee found that the claim was subordinate to the limited partners' interest because, under the profit sharing agreement, Ms. Athanasoulis was only to receive her share after the limited partners were repaid capital investment and returns.

Lower Court Finds Claim Provable

Justice Kimmel of the Ontario Superior Court of Justice allowed Ms. Athanasoulis' appeal from disallowance, finding the claim was for breach of contract, not an equity claim under the BIA, and directed that it be valued in subsequent proceedings.

The Proposal Trustee and limited partners appealed.

Court of Appeal: No Equity Claim Arising from a Contractual Interest

The focus of the Court of Appeal was on the interpretation of the definition sections of the BIA, chiefly:

equity claim means a claim that is in respect of an equity interest, including a claim for, among others,

• (a) a dividend or similar payment,
• (b) a return of capital,
• (c) a redemption or retraction obligation,
• (d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or
• (e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d); (réclamation relative à des capitaux propres)

equity interest means

• (a) in the case of a corporation other than an income trust, a share in the corporation — or a warrant or option or another right to acquire a share in the corporation — other than one that is derived from a convertible debt

Writing for the Ontario Court of Appeal, Favreau J.A. dismissed the appeal and affirmed the lower court's reasoning.

Equity Claim Must Arise from Equity Interest

The Proposal Trustee argued that Ms. Athanasoulis' claim was “in substance” an equity claim because it was payable only after limited partners received their return. The Ontario Court of Appeal rejected this, emphasizing that the 2009 amendments to the BIA introduced exhaustive definitions:

“[55] In this case, s. 2 of the BIA defines an “equity claim” to “mean” a claim “in respect of an equity interest”. “Equity interest” is specifically defined, with respect to a corporation, as “share in the corporation — or a warrant or option or another right to acquire a share in the corporation”. This is an exhaustive list of ownership interests. The use of the word “in respect of” and “including” in the definition of “equity claim” does not expand or modify the meaning of “equity interest”; it simply lists the types of claims that might arise from an equity interest, which are a claim for (a) a dividend or similar payment, (b) a return of capital, (c) a redemption or retraction obligation, (d) a monetary loss resulting from the ownership, purchase or sale of an equity interest, or (e) contribution or indemnity relating to any of (a) to (d). A careful reading of the definitions of “equity claim” and “equity interest” signals that an equity claim is meant to arise from nothing other than an ownership interest in a corporation. This definition may give rise to a wide variety of claims, but the origin of the claim is meant to be limited to an ownership interest.”

Ms. Athanasoulis held no shares or units in YSL or YG. Her entitlement arose from her employment contract and the oral profit sharing agreement, not from any ownership stake.

The Ontario Court of Appeal distinguished the profit sharing claim from the claim for contribution and indemnity disallowed in Re Sino-Forest Corporation, 2012 ONCA 816, 114 O.R. (3d) 304. Finding that the lower court's interpretations of “equity claim” and “equity interest” were consistent with Sino-Forest, the court cited Justice Kimmel's statement with approval:

“The Proposal Trustee relies on the Ontario Court of Appeal's decision in Sino-Forest, at para. 44, which states that the term equity should be give an expansive meaning. In that case, the claim by the auditors for contribution and indemnity was derivative of a claim against them by corporate shareholders (equity holders). A claim for contribution and indemnity in respect of a claim for a monetary loss resulting from the ownership, purchase or sale of shares fall squarely within the examples of equity claims expressly provided for in the definition of equity claims under s. 2 of the BIA. In Sino-Forest, the Court's expanded view was in its recognition that the auditors' claim grounded in a cause of action for breach of contract did not change its essential character as a claim for contribution and indemnity in respect of shareholder (equity) claims.”

Finally, the Ontario Court of Appeal commented that the apparent unfairness of Ms. Athanasoulis being paid ahead of the limited partners in the context of the bankruptcy proceedings cannot drive the determination of whether the profit-sharing claim is an equity claim.

Claim Is Not Too Contingent or Remote

The Proposal Trustee also argued that the claim was speculative, since the YSL project was never completed and no profits were earned. The Ontario Court of Appeal disagreed, and endorsed the statement of law by Justice Kimmel in the lower court:

“The accepted repudiation of the Profit Sharing Agreement converted a future right to receive actual profits…into a current right to receive damages for breach of contract.”

The Ontario Court of Appeal distinguished between contingent claims (dependent on future events) and unliquidated claims (difficult to quantify):

“The Trustee argues that this case is different from other employment cases because Ms. Athanasoulis' entitlement to share in the profits of the YSL project depended on the project going ahead and being profitable, which did not occur. I disagree. Again, this argument misses the point that the claim arose on the date of the breach. At that point, as found by the arbitrator, Ms. Athanasoulis had an interest in the profit-sharing agreement. The breach of her employment contract means that she lost the opportunity to earn profits under the profit-sharing agreement. Although it may be difficult to quantify this lost opportunity, arguments about quantification do not transform this claim into a contingent claim.”

Ms. Athanasoulis' claim was not too remote or speculative, merely difficult to quantify, and therefore provable under the BIA.

Key Takeaways

This decision provides important guidance for the provability of claims in insolvency proceedings:

1. Equity claims must arise from equity interests, as these terms are defined in the BIA. Ownership interest is a key consideration.
2. Unliquidated damages are provable claims. Difficulty in quantifying a claim does not make it too remote or speculative to be unprovable.

Priority under the BIA is determined by the nature of the claim. Contractual claims for damages, as unsecured creditor claims, take precedence over equity claims in bankruptcy proceedings. While equity owners may contractually rank prior to the claimant's entitlement to payment prior to the breach of a contract, the breach converts the contractual entitlement into a claim for damages.

The decision reinforces the importance of statutory interpretation and the limits of common law “substance over form” arguments in the post-2009 BIA landscape. It also underscores the need for trustees to carefully distinguish between equity and contractual claims when assessing provability, and allowing or disallowing claims under the BIA. The case is also a reminder that equity claims are often the “poor cousin” of creditor claims in insolvency proceedings.

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